Canada's defence ramp-up is reaching small and medium businesses at very different speeds.

A new study from BDC, produced with The Icebreaker, sorts them into three groups: defence-focused firms trying to scale now, companies moving cautiously between civilian and military work, and prospective suppliers still working out how to get in.

Demand is rising across all three. The firms best placed to meet it have the least room to grow, and the firms with room to grow are the least ready.

The study surveyed 268 companies active in defence and 374 interested in entering. The sample was non-probabilistic and skews to Ontario, so it describes the firms surveyed rather than all Canadian SMEs.

Defence-heavy SMEs earn most of their revenue from the sector. They have customers and demand but no slack: 21% are at full capacity and 30% struggle to hire. A majority plan to significantly increase investment over the next year, and none plan to cut it.

Defence-light SMEs earn most of their revenue from civilian work and hold more spare capacity. They want steadier, clearer demand before they commit it.

The third group wants in. These firms cluster in IT, manufacturing, construction and professional services, and many already hold capabilities defence needs. Their challenge is turning that into a credible place in a regulated supply chain.

Defence-heavy SMEs are more likely to seek capital: 60% plan to within a year, against 47% of defence-light firms. Of the defence-heavy firms looking, 74% want at least $1 million, mostly as equity to fund expansion. Defence-light firms lean toward lines of credit and working capital.

Getting it is the hard part. More than half of firms seeking financing expect difficulty, and a third expect it to be severe. The report blames lender caution: concentrated customers, uneven cash flow, and the legal and reputational risk lenders attach to defence work.

BDC says it has completed more than 100 defence and dual-use transactions since launching its Defence Platform in December 2025. Peter Dawe, Vice President, Defence Strategy at BDC, said those include both established firms and businesses entering through dual-use applications, though he did not break down the split.

"We're seeing growing interest from firms in adjacent sectors, particularly advanced manufacturing, aerospace and technology, that are looking to move into defence," he said. "At the same time, established firms are investing to expand capacity and meet rising demand."

Capital is only half the problem for prospective suppliers. The leading barrier for firms planning to enter within three years is meeting defence-specific requirements. Depending on the work, that means security clearances, Controlled Goods Program registration, cybersecurity systems, or certifications such as ISO 9001 or AS9100, all of which cost time and money before a firm has won any defence revenue.

"There isn't a single hurdle," Dawe said. "For most SMEs, it's the combination that creates the challenge."

Many firms also get caught in a loop: they want firmer demand before they invest, but often have to clear the requirements before a customer will look at them.

"The pipeline is there," said Matthew Lombardi, CEO of The Icebreaker. What is missing, he said, is a clearer route through procurement, compliance and financing.

Two-thirds of the defence SMEs surveyed import or export, and a similar share expect some growth over the next two years to come from abroad. Across the broader Canadian defence sector, the U.S. takes 63% of exports against 21% for Europe.

Dawe said heavy U.S. reliance can become a vulnerability without diversification, but called capacity the more immediate constraint. Demand in allied markets means little, he said, if firms lack the financing and certifications to serve them. BDC is working with Export Development Canada and the Canadian Commercial Corporation to help firms reach those markets.

The Parliamentary Budget Officer estimates Canada needs $159 billion in core defence spending by 2035 to hit 3.5% of GDP, more than double current levels. Most of that capacity will have to come from SMEs.

The demand is coming. Whether enough firms will be ready to deliver against it is the harder question, and according to the survey it comes down to two things: access to capital and the cost of entry.